KVH Industries, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. KVH designs and sells mobile connectivity products and services and inertial navigation products. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise stated.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $41.1 million | $42.3 million |
| Operating loss | $4.7 million | $3.6 million |
| Net loss | $4.7 million | $4.0 million |
| Basic and diluted loss per share | $0.25 | $0.22 |
| Operating cash flow | $(3.5) million | $5.0 million |
| Capital expenditures | $4.4 million | $5.2 million |
- Service revenue rose 12% to $26.7 million, while product revenue fell 22% to $14.4 million. Costs of sales were 63% of revenue in both periods. Product gross margin declined to about 25% from 39%; service gross margin improved to about 44% from 35%.
- Operating margin was approximately negative 11.4%, versus negative 8.5%. Net margin was negative 11.4%, versus negative 9.4%.
- Mobile connectivity revenue increased 9% to $33.2 million, and the segment reported $1.3 million of operating income versus a $0.4 million loss. Inertial navigation revenue fell 33% to $7.9 million, and the segment swung to a $0.5 million operating loss from $2.1 million of income.
- Cash, cash equivalents and marketable securities totaled $16.7 million at quarter-end, down from $24.5 million at December 31, 2021. Working capital was $50.7 million. Total liabilities were $37.1 million; no revolver borrowings were outstanding. The company reported $12.4 million of borrowing availability under its $15 million revolver, subject to conditions and covenants.
Changes and notable items
- Revenue declined 3% year over year, primarily because inertial navigation product sales fell $3.7 million, including a $4.5 million decline in TACNAV sales. Mobile connectivity service sales increased $3.0 million, led by mini-VSAT airtime.
- Operating loss widened by $1.1 million. The filing attributes pressure to the segment mix and higher selling, marketing and support costs, among other items. Other income improved by $0.9 million, mainly due to foreign exchange gains, partly offsetting the operating deterioration.
- Operating cash flow fell by $8.5 million year over year to an outflow, reflecting working-capital movements as well as the larger net loss.
- In March, KVH reduced its workforce by approximately 10%. It recorded $1.7 million of restructuring and related legal/advisory costs in Q1 and expected another $0.5 million of severance costs. Management expected cost savings to begin in Q2.
- CEO Martin Kits van Heyningen retired from executive and Board roles; COO Brent C. Bruun became interim CEO. KVH recorded approximately $0.5 million of transition-related costs through March 31 and expected ongoing compensation expense through March 2023.
- On April 29, 2022, after quarter-end, KVH sold KVH Media Group Entertainment Limited for net proceeds of approximately $2.5 million. The sale was not treated as a discontinued operation.
Outlook, risks and contingencies
- KVH gave no specific consolidated revenue or earnings guidance. Management expected full-year airtime revenue growth, but at a lower rate than in 2021, and continued to anticipate re-signing some former legacy-network customers during 2022; it did not expect to retain all of them.
- Management said available liquidity and expected operating conditions should fund working capital, capital expenditures and obligations for at least 12 months from the filing date, while cautioning that weaker-than-expected results could require additional financing. The revolver matures October 28, 2022; covenant restrictions limited availability, and KVH reported compliance with covenants at quarter-end.
- Supply-chain delays and higher raw-material costs continued to affect manufacturing and product deliveries; KVH expected higher material costs to persist through 2022. Certain product components are single-sourced.
- Backlog was $25.1 million, of which $9.3 million was subject to customer cancellation for convenience; management cautioned that backlog is not a meaningful predictor of future revenue. Marine leisure business is seasonal.
- KVH reported no legal matter that management believed likely to materially harm the business, financial condition, results or cash flows. It reported no impairment of goodwill or other non-financial assets in Q1.
Important facts for investors to verify
- Whether mini-VSAT service growth and margin improvement can continue, including retention of customers migrating from the discontinued Arclight network.
- Whether inertial navigation demand, particularly TACNAV orders, recovers and how product mix affects margins.
- Whether restructuring savings offset transition, severance and other costs, and whether the expected cost reductions begin as planned.
- Liquidity and covenant headroom as the revolver approaches its October 2022 maturity, given negative operating cash flow and capital spending needs.
- Effects of supply constraints, input-cost inflation, seasonal demand and cancellable backlog on deliveries and cash conversion.
- Use of proceeds and ongoing financial effects of the post-quarter sale of KVH Media Group Entertainment Limited.